High Energy -- New CAL Commercial Real Estate Disclosure Law

After several delays, CAL Assembly Bill 1103 Commercial Energy Disclosure went into effect on January 1, 2014. It requires the owners of all commercial buildings over 10,000 square feet which are being leased, sold, or refinanced to comply with the law. The final phase will go into effect on July 1, 2014, requiring the owners of all commercial buildings over 5,000 square feet to comply. The statute can be found at California Resources Code section 25402.10. What is the purpose of AB1103? The California legislature has set aggressive energy efficiency goals. The AB1103 Commercial Energy Disclosure program was created with the goal of making energy efficiency part of the discussion during a real estate transaction: the ultimate goal is to reduce energy waste in commercial buildings throughout California. The idea is also to benchmark buildings with similar features, allowing potential purchasers to easily shop around for more energy efficient buildings. Not only do energy efficient buildings help to reduce greenhouse gases, but they also usually translate into lower than average utility bills.

What does AB1103 require? Property owners who are going to sell, lease, or refinance an entire commercial building must upload one year’s worth of energy use data and space use attributes into the U.S. Environmental Protection Agency ENERGY STAR Portfolio Manager. This tool will process the building’s energy information and allow the property owner to generate a Data Verification Checklist disclosure form. The disclosure must be provided to the purchaser or lessee no later than 24 hours prior to the execution of the sales contract or lease agreement. In the case of a refinance, it must be provided to the lending institution no later than submittal of the loan application.

AB1103 also requires utility companies to provide the most recent 12 months of energy use data to property owners. The utility company will have the discretion to determine how to provide the energy use data information to the building owner. Currently, only the three major California utility companies (SoCal Gas, SCE and SDGE) are set up to provide the information directly through Portfolio Manager. It is anticipated that others will provide the information via a spreadsheet or similar means and the owner will then need to manually enter the information into Portfolio Manager in order to generate the disclosure form. The utility companies will also have the discretion to deal with confidentiality issues related to providing energy use data to owners when the bills are under the tenants’ names. Although AB1103 does not require any action to alter or update building systems on a property, AB1103 may encourage building owners to install energy efficient building systems to make their properties more marketable.

Who is exempt from AB1103? The most significant exemptions from AB1103 are factory, industrial, and residential properties. If the property in question is a mixed use property containing any of these exempt uses, then the entire building is exempt. Commercial buildings under 5,000 square feet are also exempt. It is also important to note that commercial buildings entering a contract before July 1, 2014 that are less than 10,000 square feet are also exempt. After July 1, 2014, all commercial buildings 5,000 square feet and larger will have to comply.

Who is enforcing AB1103? The property owner is required to release the disclosure report to the lessee, new property owner, lender, and the California Energy Commission (CEC). Enforcement for the law will be complaint driven and the hope from the CEC is that enforcement will be primarily market-driven.